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A tale of two recoveries

By Sheyna Steiner ·
Tuesday, October 1, 2013
Posted: 7 pm ET

If household incomes were tightly linked to corporate profits, everyone would live on "Easy Street." As it is, many Americans live at the intersection of "No Job Avenue" and "Would You Like Fries With That Lane." This chart illustrates the yawning disconnect between incomes and the stock market and corporate profits. At the end of 2011, Standard & Poor's 500 index was up 1,500.5 percent since 1975. That line moves sharply up and to the right while the line representing median household income resembles a slightly lumpy pancake.


"There is not much correlation between the median income and what the stock market does," says Doug Short, vice president of research at Advisor Perspectives.

What's going on here? Why have companies recovered from the recession while households are actually worse off?

Low-paying jobs took the place of midrange jobs

The rising tide that should be lifting all the boats is leaving most Americans high and dry. Many of the jobs added to the economy since the recession ended have been part-time or lower-wage jobs.

According to a report released in August 2012 by the National Employment Law Project, since 2001, low-wage jobs have grown by 8.7 percent. High-wage jobs, on the other hand, have grown by 6.6 percent. The number of jobs that pay somewhere between the two extremes has fallen 7.3 percent.

Americans also have dropped out of the labor force in vast and terrible droves. According to economist Tyler Cowen's blog, Marginal Revolution, labor force participation is down to the lowest level since 1978.

Technology means people aren't needed

Advances in technology have wrought indelible changes to the employment landscape. Businesses can produce more with fewer workers. And workers are expensive.

"Businesses have incredibly increased their productivity. They've become much more productive and are spending less and producing more," says Short.

Corporations are less reliant on Americans for sales

It's a small world -- if you're a multinational corporation such as General Electric or Apple. In the global economy, American consumers don't have to drive revenues for businesses. If the American consumer can't buy products, there's a market in China, Russia or Brazil, to name a few.

"Corporations are not as reliant on the median-income households in the U.S. to provide their business income," says Short.

Incomes are down since the recession ended

Sentier Research tracks incomes on a monthly basis and has up-to-the-moment data, unlike the Census Bureau, which has crunched the numbers only up to 2012. According to Sentier's data, household income continued to decline after the recession officially ended in 2009. Plus, it's lower than when the firm began tracking monthly changes in median household income in January 2000 -- down 7.2 percent.

"If you take the latest employment report from August, median income was down 2.4 percent since June 2009," says Gordon Green, partner at Sentier, a research and consulting firm.

"Groups with incomes furthest below the median had the biggest declines in their income during the recovery. Young people, blacks, single mothers, those with low levels of education -- those are the people who really got hit hard in this," he says.

Corporate profits are at an all-time high; stocks not far behind

Stock prices can sometimes be divorced from company fundamentals or what the company is actually worth. Monetary policy from the Federal Reserve System has pushed many people into the stock market who wouldn’t otherwise be there. That's been one driver behind the stock market's recent highs this year.

By and large, the American consumer is not profiting from the stock market's appreciation. In 2010, just 46.9 percent of households had stock holdings, and 31.1 percent owned more than $10,000 in equity investments, according to the Economic Policy Institute.

The stock market is doing well, and people with a lot invested in the stock market are doing well. Companies themselves are also in pretty great shape. In fact, corporate profits as a percentage of gross domestic product are at an all-time high. We can see that from this nifty chart supplied by the St. Louis Federal Reserve Bank.


If historical trends prevail, that won't last for long.

"You see that this historically tends to be a mean reverting data item. Corporate profits can skyrocket and go to peaks, like they did in the late '40s. It spikes and drops and oscillates around a shorter-term mean," says Short.

"Where does it go from here? Will corporate profits continue to go up? Historically speaking, you have to be nervous about getting a reversion to the mean -- hopefully nothing like what we saw with the great financial crisis. It would be perfectly normal to expect this to pull back over the next few years."

How will American consumers get back on track? Analysts, pundits and researchers have lots of ideas that could help: raising the minimum wage, keeping higher education affordable, closing tax loopholes that only benefit big businesses or the very wealthy. Unfortunately, the federal government seems to have other plans.

Follow me on Twitter: @SheynaSteiner.
Senior investing reporter Sheyna Steiner is a co-author of "Future Millionaires' Guidebook," an e-book written by Bankrate editors and reporters. It's available at all the major e-book retailers.

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October 04, 2013 at 11:19 am

Frank's right - it seems as if the median income is adjusted down for inflation while the S&P is not.

Frank Nappa
October 04, 2013 at 4:37 am

The first chart looks like nominal S&P vs real houshold income. Nominal household income has gone up about 500% sinve 1975.